TMTPost -- For the first time in nearly a year, China cuts both of major short and long-term interest rates, signaling its determination to shore up the world’s second largest economy following a key Communist Party leadership meeting.

Credit：Xinhua News Agency

The People's Bank of China (PBoC) announced interest rate on seven-day reverse repos, a key short-term policy rate, was lowered from 1.8% to 1.7%, the first cut to the rate since August, 2023. China’s central bank said it would improve the mechanism of open market operations. These are new efforts to strengthen counter-cyclical adjustments and better support the real economy.

The PBoC then said it slashed the interest rates on its standing lending facility (SLF) on Monday, aiming to improve the monetary policy transmission mechanism. The overnight rate was cut by 10 basis points to 2.55 percent, and the seven-day and one-month rates were each lowered by 10 basis points to 2.7 percent and 3.05 percent, respectively. The SLF, introduced in 2013, acts as a channel to meet the liquidity needs of financial institutions. These institutions can take out SLF loans from the central bank, using qualified bonds and other credit assets as collateral.

Monday also saw market-based benchmark lending rates at a monthly fixing were cut. The one-year loan prime rate (LPR), that most new and outstanding loans in China are based on, was 3.35 percent on Monday, down from the previous reading of 3.45%, and the five-year LPR, on which many lenders base their mortgage rates, was reduced by 10 basis points to 3.85%, according to the National Interbank Funding Center.

The state media Xinhua News Agency the LPR cuts aligned with market expectations as authorities stepped up monetary support to bolster the economy.Experts suggest that as the level of interest rate marketization continues to rise and the transmission mechanism of interest rates becomes more robust, two policy interest rates are no longer necessary, as the central bank is expected to primarily control the short-term interest rate, similar to the open market operations rate.

The central bank's operations on Monday may have already indicated the direction of LPR reform, according to a research note by brokerage Minsheng Securities. The note said the rate cuts had "turned a new page" for China's interest rate transmission mechanism. "The benchmark reference for LPR might have been adjusted from the previous one-year medium-term lending facility (MLF) rate to the 7-day reverse repo rate," said the note.

The growing expectations for the Federal Reserve to start cutting interest rates also gave the PBoC room to ease its policy, given the pressure the yuan has been under because of a wide yield gap with the dollar, said Ju Wang, head of Greater China FX & rates strategy at BNP Paribas.

The rate cuts came a day after the Resolution of the Central Committee of the Communist Party of China (CPC) on Further Deepening Reform Comprehensively to Advance Chinese Modernization was made public. The reform resolution was the most most outcome of the third plenary session of the 20th CPC Central Committee, said Tang Fangyu, deputy head of the CPC Central Committee Policy Research Office, at a press conference last Friday.  

The resolution, with economic structural reform as the spearhead, comprehensively plans reforms in various fields and aspects, Tang said, adding that the resolution puts forward more than 300 important reform measures, all of which involve reforms on the levels of systems, mechanisms, and institutions.